By  on June 7, 2005

NEW YORK — Determining the origins of the chargeback is like trying to identify the first restaurant patron to press a $5 bill into the palm of a maitre d's hand.

It seems the development of chargebacks — and the related issue of markdown money — was evolutionary, not revolutionary, with people refining the idea over time.

Markdown money, said Morris Marmalstein, former president of The Warren Group, was the invention of Stanley Marcus and Vincent Draddy, former chairman of David Crystal, a sportswear manufacturer Draddy joined in the Fifties.

"One year Neiman Marcus bought too many dresses and Stanley said to Draddy, 'Maybe I'll charge you a few dollars for the dresses,'" Marmalstein related. "That was the first markdown money."

In the early days, "You had relationships with buyers," said Marmalstein. "While the transactions were spirited, there was a fairness. You don't have that today. One of the last things that happened before I retired in 1995 was that a major store account said, 'You owe us $100,000.' I said, 'I don't owe you anything. You placed an order and I delivered it on time.'"

As for chargebacks, an executive identified by industry observers as key to their development was David Farrell, who was chairman and chief executive officer of May Co. from 1979 to 1998. Farrell is credited with coming up with the idea of charging vendors for shipping and labeling mistakes. He also has the distinction — viewed as a dubious one by some executives — of being an architect of the matrix, which imposes strict sales and profit requirements on vendors, narrowing the number of brands that are sold in stores.

Many believe the matrix and chargebacks work hand in hand.

"May Co. turned chargebacks into a science, and in some cases, a profit center with respect to shipping infractions," said the former ceo of a regional department store, referring to penalties the retailer levied for late orders and improperly tagged garments.

"May Co. was trying to leverage its size to get the best deals possible," said Kirk Palmer, a former May Co. executive who founded a self-named executive search firm. "The responsibilities of a merchant began to change and became more about deal-making than merchandising and product."

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